In 1672, Potosi, Bolivia, was one of the largest and richest
cities in the world. Located at the base of Cerro Rico, Potosi
was a hotbed of Spanish silver mining, the operations of which
were so prolific, a potosi became synonymous for great
Three hundred forty years later, Potosi is poor and rife with
conflict. Just last month miners barricaded all routes out of
the city, trapping more than one hundred foreign tourists for
twenty days. Its hardly a surprise that the Bolivian
press calls mining the burden of Potosi.
Latin American history is littered with tales of commodity
booms gone bust like Potosis. That the quick riches never
seem to produce lasting wealth has led some to conclude that
the region, like other resource-rich regions, is under a
natural resource curse.
But for Latin America, where 93% of the population and 97% of
economic activity is in countries that are net commodity
exporters, the hex is far from universal. A team of World Bank
economists and political scientists this year has found some
important trends suggesting that todays commodity booms
will not end like the old.
One reason for this optimism is good governance. National
governments and financial institutions are far better than they
used to be and much more likely to manage the latest commodity
windfalls with an eye on long-term growth over short-term
Chile, the worlds largest copper exporter whose
commodities account for more than 75% of its exports, is a case
in point. Years ago the countrys leaders, on both ends of
the political spectrum, agreed to save a significant percentage
of earnings from the copper boom and spend the rest
In the past five years, the countrys investments in
innovation have grown on average 24% annually. At the same
time, Chile has invested vigorously in education and created a
US$6 billion scholarship fund that will take some 3,300
professionals abroad to study this year a 672% increase
Had Chile ignored the need to improve productivity, invest in
human capital, and encourage innovation, its commodity
dependence could have become a liability and undermined growth.
Instead, over the past decade, Chiles gross domestic
product grew more than two and half times.
The other reason for optimism is that commodity production in
the region is changing. In the past, foreign companies profited
most -- they built the road or the railroad to the mine,
extracted the countrys wealth, took it abroad and left
poorer nations behind.
Today, it is far more common to see commodity extraction linked
to other economic activities directly benefiting the source
country. A 2009 study of a Peruvian gold mine, for example,
found an extensive network of local businesses tied to the
operations of the mine. Each 10% increase in the mines
economic activities paralleled a 1.7% increase in local
Whats more, regional commodity producers no longer need
to be foreign to be big and skilful. In Brazil, the main force
behind its farming revolution is Embrapa, the Brazilian
Agricultural Research Corporation. Thirty years ago, the
countrys vast savannas, known as the cerrado, were deemed
too acidic for any sort of productive farming. The cerrado is
nowadays a new Brazilian heartland and accounts for over half
of Brazil's farm output.
Embrapa, a public company founded in 1973, is now considered
the worlds leading tropical-research institution. Its
major achievement has clearly been to turn Brazil, in less than
three decades, from a food importer to one of the top food
exporters in the world.
This degree of progress requires investment in research and
development. It also requires long-term vision and, more
importantly, long-term savings. The region as a whole,
unfortunately, does not excel on these fronts yet. Of the five
countries in the region that set aside hydrocarbon or mineral
revenues into an investment fund during the 2002 boom, only two
had enough savings to contribute to their recovery
History has shown that negative outcomes in resource-abundant
countries are mainly confined to those with poor governance.
Demands to spend during a boom are politically hard to ignore,
particularly for weak regimes with little credibility. Without
sufficient savings, any boom is likely to turn into a
The good news is that governance in Latin America has come a
long way. And for most countries in the region, commodities now
are far more likely to be a blessing than a curse.
Augusto de la Torre is Chief Economist for Latin America and
the Caribbean at the World Bank